Private placement: how to find the right financing among all the proposed solutions for strengthening equity capital?

In response to the Covid crisis, France's "whatever it takes" strategy has led public authorities and financing players to propose new financing mechanisms. The primary objective of these tools is to meet financing needs, sometimes by enabling SMEs to strengthen their equity capital. Private debt, PGE, PPSE, stimulus bonds, each of these instruments corresponds to an SME profile and not all companies can use them in the same way: everything depends on their maturity, the robustness of their model and their P&L, their ability or not to open up their capital.

Traditional private placement financing tools: to be chosen according to the maturity and cash flow of the SME

The private placement covers several realities depending on the structuring chosen, which depends on the stage of maturity of the SME's development, the robustness of its balance sheet and its capacity to generate income and therefore to support regular repayments.

Indeed, financing by capital increase (the "equity") makes it possible to reinforce the equity of the company while preserving its cash flow (since the remuneration passes only by the possible payment of dividends). But it also dilutes the founder's share of the capital and is, in the long run, the object of a high remuneration, justified by the important risk that the investors take. It is generally used by SMEs that are still at an immature stage of their development.

Conversely, pure private debt, which involves a bond issue, has the advantage of not diluting the founder. Unlike bank financing, in which the capital is repaid as it is received, it is repaid "in fine" at maturity. Only the interest ("coupons") are due during the term of the bond, which is advantageous in the context of a development process. The interest costs are higher than in the case of bank financing, but less expensive than in the case of equity financing. This type of financing is therefore reserved for SMEs at a relatively advanced stage of their development, generating sufficient income to support the repayment of the coupons during the life of the bond and the repayment of the capital at its maturity.

Between these two types of "pure" securities issues (all equity or all bonds) there is a whole panel of "mixed" financing structures, in order to respond, in the most suitable way, to the profile and stage of development of the SME: equity/bond mix (issue of equity securities and debt securities), equity/OC mix (convertible bonds), OS (dry bond) /OC mix (convertible bond). Regardless of the structuring chosen, SME financing through private placement allows the SME to diversify its sources of financing, while strengthening its equity.

The new tools for strengthening equity capital, PPSE and stimulus bonds: not yet distributed, they are not open to all SMEs and do not allow for the financing of all projects

In early March 2021, the French government announced the deployment of two schemes to promote recovery by strengthening the equity capital of French SMEs and ETIs:

State-supported equity loans ("PPSEs"), distributed by banks, are for 8 years. They may be combined with PGEs, but in this case, however, will be capped. The interest rate will be between 5 and 6% depending on the size of the SME and the pricing will be specific to each bank. The loans will be amortizable after 4 years: during the first four years, only the interest will be reimbursed, the reimbursement of the capital will be added from the fifth year.

The "stimulus bonds", which are subordinated bonds distributed by private equity players. They benefit from the same state guarantee as the PPSE, with a rate varying from 5 to 6% depending on the size of the company. A notable difference with the equity loan is that repayment will be entirely "in fine": only the interest will be repaid during the 8-year term, with the bond amount being repaid in full at maturity.

At first glance, these new schemes seem to have all the advantages: strengthening of equity without diluting the founder, deferred and even bullet repayment of capital, rates below those usually charged... However, in principle they are not open to all SMEs, which must meet certain conditions and cannot cover all needs:

  • Minimum turnover of 2M€ in 2019
  • SMEs with a minimum Fiben rating (Banque de France) of 5+.
  • Maximum amount of 12.5% of 2019 sales (and 10% if combined with an EMP)
  • Impossible to finance pre-existing debt, which excludes refinancing and, probably, cash out.

Above all, as long as these sums allocated by the insurers have not been deployed (only the PPSEs have been announced for the month of May), it is difficult to know whether SMEs will really be able to benefit from them or whether it is mainly the large SMEs and ETIs that will be granted them.

The solution, available on FirmFunding, is to diversify your sources of financing

Capital increase, senior debt, mezzanine, PPSE, stimulus bonds... not all solutions are adapted to all SMEs, and not all financing professionals offer them. How can you access a suitable financing method and benefit from its advantages when you do not know all the professional investors?

FirmFunding, the first and only funding platform dedicated to private placement, allows SMEs to submit their financing project online, likely to be structured between all the categories explained above: pure private debt, equity, equity/debt mix, revival bonds, depending on the financed need, its amount and the SME's major metrics.

For example, an SME with both a €1 million working capital financing need and a €1 million refinancing need can submit and put online a single file, for an amount of €2 million, which will be instantly presented to the registered professional investors (+200). Depending on the possibilities of these investors, the file can be financed in relaunching bonds (for the working capital financing part only), in debt and/or equity for a part or the totality, by one or several investors.

In order to meet the requirements of private debt professionals and enable SMEs to find the most suitable solution for their situation, the FirmFunding teams provide their expertise to determine which financing solutions are possible and most suitable. They assist SMEs and advise them on the points to develop and highlight in order to attract the interest of investors registered on the marketplace.

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